Today we have a special episode with Hong Lu, founder of UT Starcom, one of the pioneering telecom companies in China. Hong is widely respected not only as a tech entrepreneur, but also as founding chairman at SoftBank China Venture Capital (which wrote an initial $18m check for Alibaba), and for his close friendship and successful collaboration with Masayoshi Son, founder of SoftBank Group and the Vision Fund. The story goes, while working the night shift at an ice cream shop near UC Berkeley, Hong met Masa Son, who refused to pay for a milkshake unless it was made extra thick. The two Japanese speakers became fast friends and eventual business partners on Masa’s first start-up, an electronic translator that would sell to Sharp for $1.7m, and the rest is history. Hong shares with us his personal story, what it was like partnering with Masa on multiple ventures over the years, bringing wireless services to China, and key lessons learned along the way. Enjoy!
Early Days at Berkeley and Working with Masa (1’20’’)
Thanks so much for joining us today. As is customary on our show, before we dive into the details of your career, could you tell us a bit more about yourself, where you're from, and what are some of your formative experiences?
Hong: Sure Adam, thank you for inviting me. I was born in Taiwan, and my family moved to Japan when I was six. My best language is actually Japanese and I learned my Chinese in Japan. After high school I decided to come to the U.S. for further education. At that time large corporations typically don’t hire foreigners. So unless you wanted to start your own or inherit your parents’ business, there weren’t many good career paths. I am glad that I went to the U.S. It opened up a lot of opportunities for me. I am very thankful for that.
Let’s spend a little bit of time on your undergrad experience at UC Berkeley as a civil engineering major. A very famous story about your time there was that you used to work the night shift at an ice cream shop. I’d love to hear more about your experiences there and some of the stories from those years.
Hong: I used to work at an ice cream shop in Oakland. It was a very popular shop. We used to have 3000 customers a day during busy weekends in the summer. I started out as a dishwasher. I worked very hard and my boss took notice, and he eventually promoted me to work at the fountain. One day I asked them to teach me how to make ice cream because washing the dishes was not fun. When one of the fountain employees got sick, I was asked to help out and fortunately for me, my boss kept promoting me and made me the night shift manager.
That was when I met Masayoshi Son (Masa). It was a very interesting encounter. The waitress came to me and said, “Hey Hong, I have a strange request from a customer. If we don’t make exactly what he requested, he would refuse to pay.” We had so many customers and a one-hour waitlist. It was amazing that he said he’d refuse to pay. So I said, if he doesn’t pay, we wouldn’t allow him to come in ever again. But I agreed to make his order. I looked over from my counter and saw this Asian guy. I assumed he was Chinese because at that time there were more Chinese than Japanese there. I delivered the order myself and overheard them speaking Japanese. I was so surprised. I introduced myself in Japanese and they were very surprised, too.
I asked if the order was good enough and if they were going to pay. He said yes. And I just asked him, “why did you say that you were not going to pay?” He said that the first time he had a great milkshake, it was perfect. The second time it was very watery. If they were going to spend the same amount of money, he wouldn’t want a watery one. He didn’t complain, but just wanted the right milkshake. It was not an unreasonable request. I mean, if I were the customer and they gave me something bad, I will probably complain right away to make sure they change it, instead of paying the money and then come back again. So anyway, that was the first time I met him.
What an encounter! And how did you become close friends and work on startups together?
Hong: We introduced ourselves and learned that we both went to UC Berkeley. He was a couple years behind me in school. We ran into each other on campus and we were the only undergraduate Japanese speakers. But neither of us were Japanese. I am Chinese and he is Korean, but Japanese is our common language.
I graduated in 1978. Before graduation, I met him again at the ice cream shop. He was with his wife at that time, and she said, “Hong is about to graduate. Why don’t you ask him to help you with your business?” Masa was starting a company and looking for someone to help. But I didn’t want to work for someone who was still a student and younger than me. But he is the most persistent guy I know. He even asked his father to come to the U.S. to persuade me. He also tried to persuade my girlfriend and her family to make sure that I would go work for him.
I kept telling him I was not really interested because I worked very hard to graduate and I was ready to start making real money instead of starting a venture, and nobody was working for venture because it wasn’t a thing back then. But then he said that we should really start something together instead of working for a big company that was created by someone else.
I thought to myself, maybe I could at least work with him for two years. See if it worked out. And if it didn’t work out, I could still get a job. By the way, at that time, the ice cream shop owner also offered me to be his partner. I told him that if we could bring this ice cream shop idea to Asia, it would be so great. I told him all kinds of potential opportunities in Asia and he was very excited. I was deciding between those two jobs. And of course, I graduated from civil engineering. I could have gotten a job at a real civil engineering firm. I eventually took the job with Masa.
There was a funny story there. I worked for two weeks, and he paid me with a check. It bounced when I went to the bank. When I told Masa, he apologized and said that he had money, but just forgot to transfer it. He gave me a second check and it bounced again. I asked him, “Masa, are you sure you have the money? Why does it keep bouncing? If you do have real money, why don’t I manage it?” He agreed, so I started managing his checkbooks. And the funny part is, when we got busy and he had to go back to Japan to get contracts, I kept signing the checks myself.
We created this company, and I had to register it and go through the legal work with lawyers. It was a very interesting process to establish a company yourself. I have to say, I really appreciate how he gave me the opportunity to go through all of that. I mean, most people have to pay for the learning experience, but I was paid to learn.
That’s a fascinating story and the details of which people have never heard before. What was the first company you worked together on?
Hong: He persuaded me because he got a contract with Sharp and showed me a prototype. It was a pocket translator. There was a synthesizer built in so it could talk to you. It was an interesting thought and a very advanced technical gadget for a lot of people. We managed to bring it to market and Sharp sold it for many years.
(Electronic translator from Masa and Hong's first start-up)
It was clearly a lot of hard work. What did it take to come out with this product?
Hong: Masa was about to marry Masami Ohno. He promised her that he would make sure to bring food to the table and take really good care of her. He promised her that he would make one invention every day. So he created a program that combined two random words together, and one time the two words were “talking” and “translator.” He already made a few inventions and managed to sell some of them. But this was the idea that he sold to Sharp. So when I started, I took over a few projects because he was still in college. That was how he came up with the talking translator.
What was the initial team in the early days? How did your typical days look like and what was Masa doing?
Hong: When I started, I was the only employee. We didn’t have any money. Before then, Masa was working on the prototype with Professor Moser at Berkeley, who worked for NASA and invented the speech synthesizer chip. So Masa paid some of his students on a project basis. When I started, I took over some of those projects to make sure that we could deliver them to Sharp. Then we added about five or six people – a receptionist, engineers and a few others.
At that time, Masa’s first priority was being a student. Of course, when we needed to negotiate with companies, Masa had to fly back to Japan. Flying was so expensive then, so I told him to leave school for a semester to do the work and get the contracts. He said that, “Hong, it isn’t fair. You already graduated and I haven’t. If you promise me and let me graduate, then I’ll go.” He was my boss, but I think he had a lot of respect for me.
You’ve known Masa for 30+ years. How would you say Masa has changed over the years? Did he have a multi-hundred-year vision, even back then?
Hong: Well, the first day of work, he asked me to go to his apartment to report to work. He said, “Hong, why don’t you make a three-year plan?” I said, “I don’t even know what we are doing, and you’re asking me to give a three-year plan?” But he said, “Oh yeah, we need to do that three years prior.”
He was always very fascinated by cash flow and wanted the revenue to come in. He wanted to create something on top of the talking translator business. He tried to get into magazines because of the ad revenue. He was also very interested in infrastructure. I didn’t know what infrastructure business was and he told me about gas, water, road, railroad, etc.
Masa was very sophisticated. Even as a student, he must have read a lot of things when I was too busy figuring out how to build the bridges or the dam in school and working for the ice cream shop.
He is a very unusual person. He’s a very persuasive person and he knows what he wants. When I first met him, he was probably only 20 years old and he was already saying that we needed to create the business with cash flow coming in. That was amazing.
Building UT Starcom (33’10’’)
Shifting the focus more to you, Hong – you've built a number of companies over the course of your career, UT Starcom among the most prominent. How did the journey start?
Hong: When I was working for Masa, he went back to Japan one time because his father became ill and Masa had to help his business. My wife, Lucy, and I went to visit him. And one day he got very sick. He had a serious liver issue. The doctor told me and his wife that he might not live pass 30 years old. He was 24 or 25 then. So he asked me to take over his company and he actually said, “Hong, why don’t you come back to Japan to work with me?” I said, “sorry my wife doesn’t speak Japanese. And I don’t think I can babysit her all day long in Japan.” We already had children as well. So, he asked me to buy him out. He even lent me the money to do that. We were making all kinds of products then, and I was selling software in the U.S. as well.
I was working for Masa until Kyocera, which I eventually took over as CEO for one of the subsidiaries. One of the gentlemen I knew from Epson asked me to meet Kyocera’s founder, Kazuo Inamori, on the condition that I would become the advisor to one of the subsidiaries that would launch its laser printer business.
I met him in the Kyocera’s U.S. headquarter in San Diego. He asked me to write my resume and a business plan. I said, “gee, I’m the advisor. Why do you need my resume? It’s not even my business.” But he insisted. After reading my plan, he asked me to run the business instead of being just an advisor. But I couldn’t just do that, since I had my own business. And he just said, “why don’t I invest in you? I’ll become a larger shareholder and then you can do your current business and run this laser printer business.”
I said, “Well, you’re overestimating my capability. I don’t think I can do that.” The guy from Epson that introduced us kicked me and told me to shut up. The same day, Kazuo Inamori called for an emergency board meeting and told the board that they were going to invest into our company, and I would run this business. There was no objection, so I ran a subsidiary of Kyocera for about five years.
I was the only guy in the subsidiary that had ownership. Everyone else just worked for the company. It was a great experience because when Masa and I started the business, we never had any practical training. It was a formative experience at Kyocera.
You also spent time with Masa on SoftBank, what was that like?
Hong: He created SoftBank over in Japan, but the initial investment came from the U.S., from that earlier business I was helping him manage. I had been running it for him while he was in Japan. He owned 80% of that, while I owned 20%. Actually, at the time, I actually told him to not give me share, but give me a raise. But he said “keep the share Hong. No raise, but keep the share”. Regarding Softbank which Masa created in Japan, the initial investment came from the U.S. business. I owned a decent portion of Softbank back then, I probably should have gone back to work for him instead ha!
After Kyocera, you started Unitech Telecom, before it merged with Starcom Networks. Could you share a bit more about that?
Hong: After I sold my Kyocera shares, I decided to look for other opportunities. I went back to China for the first time back in 1991. And around the same time, I connected with a schoolmate at Berkeley, Charles Xue, and through him, Peter Wang, who was in the telecom business.
China totally lacked telecom infrastructure then. Tele-density was less than 1%, meaning less than one person out of hundred had a phone. It was a huge opportunity for us to grow. Peter was working for Bell Labs and wanted to start his own company, and he made some progress with a prototype. We looked at it and wanted to get involved. So the three of us co-founded Unitech Telecom in 1991.
Unitech Telecom started with a digital local loop as a wired solution, and made a lot of progress. At one point, we had the largest market share of digital local loops in China. But we thought that Chinese users really wanted much faster phones, and we needed a wireless solution. We tried to work with the CDMA and Qualcomm, and approached the head of Panasonic Central Lab, who told me about a new product called PHS (personal handyphone system).
Long story short, Panasonic initially thought that our company was too small. But later on, they called me back saying the Telecom Ministry of Japan really liked our wireless solution idea – our original idea was wireless connection to households – so we kicked off the project together.
I told them that we could sell 250,000 lines a year and they invested $10 million in the project. We ended up with 10 million lines a year. At the time, it was a really big success. It was individual users who wanted our service, and they pressured the telecom companies to buy our product.
At that time in China, getting a line was very expensive, and even if you had the money, you had to wait 6 months to a year to get it. But using our solution, they could get it right away. We started with Panasonic, then Mitsubishi and Sharp, to license their technology. Eventually, we started making our own chip to stay competitive. In 2004, the company made $2.8 billion, which was a lot of revenue back then.
Was the revenue and growth driven primarily by selling the software and the module or were there other forms revenue streams as well?
Hong: We actually sold finished products to telecom companies. We sold the headsets, the base stations, the switches, the whole nine yards – the entire solution. Our market share was like 50%. 25% was AT&T and another 25% was ZTE.
Was it SoftBank or Masa who also made a key investment? What was the story there?
Hong: After we knew that we were profitable, we merged with Starcom. Starcom had unique software capabilities that we didn’t have, and also a much better relationship with the customer bases in China. We were only well-known in Zhejiang and Guangdong provinces.
Together with Charles Xue and Ying Wu (Founder of Starcom), we brought the combined company to Masa. We told him that we were going to be very successful in China so he needed to invest. Masa and two of his board members decided to give us $30 million for 30%. Our revenue was at that time was probably $10 million. I have to say Masa really had a lot of trust in us. I told him, if you don't invest, our company would become bigger than yours, and he said, “wow, you still talk very big.” We accelerated much faster with his investment.
(Masa agrees to invest into UT Starcom)
SoftBank China Venture Capital and Alibaba (59’51’’)
So UTStarcom became quite a large business, and I believe you also were involved with the founding of SoftBank China Venture Capital fund, an early VC in China. Could you share a bit more about that as well?
Hong: Charles Xue was one of the co-founders of UT Starcom and he used to be in charge of R&D. One day he said, “Hong, our company is getting too big and I’m not really interested anymore. I wanted to start something else. Can you persuade Masa to create a China venture fund so we can invest in China?” I said sure. At that time, we were already listed in the US and raised $200 million. Our net profit was over $100m or more. We had probably $1 billion in cash when we wanted to kick off the SoftBank China Venture Fund. I persuaded Masa and he agreed. He gave us $90 million and we brought out $10 million to create the $100 million fund.
What was your role in that fund?
Hong: At first, I played more of a chairman role, and Charles ran the day-to-day work. We looked for potentially opportunities together. We were lucky to have raised the fund during the bubble time, 2000 and 2001, since right after that, the bubble busted.
One of our most successful investments was Alibaba and Jack Ma. I remember all of us listening to Jack Ma’s presentation (Masa, Charles, Ying Wu, Bill Huang and me). None of us understood his business and we didn't really think it was that exciting. We asked him, “Are you profitable?” We were very old fashioned because if you were not profitable, then you weren’t going to raise money.
We didn't see any sight of profitability, but Masa was so excited about the business and he said we should invest $18 million. Investing $18 million out of a $100 million fund was way off the whack. You don't invest more than 10% of your fund in one company. But Masa said, “I can smell the money.” We were like, “all right, since you have 90% of the fund, we will agree with you.” So we went ahead and invested, but at the beginning, they kept running out of money and Charles had to go there and ask them to step on the brakes at times. It was an investment made out of the China Venture Fund.
That is a fascinating story that I haven't heard before in detail. Sounds like Masa never did anything small. He sees an opportunity and just goes for it. So this investment is $18 million. If you search online, people often talk about the $18 to $20 million invested in Alibaba which became about $60 billion during his IPO, and now is worth over $130 billion. So it's essentially one of the best venture investments in all of history.
(Masa's first visit to China, with Hong and UT Starcom team)
Reflection and Future Outlook (1’06’30’’)
I want to get to what’s on your mind these days as well. How do you spend your time today? What is on your mind in terms of what the next ten to twenty years looks like?
Hong: Well, a lot of the tech used to be created in the U.S. and then gradually copied and expanded in China. But now, the new concept is created from the localized need of the market, and you see this all around the world. For instance, in the U.S., you have the credit card culture, which is very convenient, but doesn’t work for many countries. China invented digital payment, including Alipay and WeChat Pay. This is similar with Grab in the Southeast Asia markets with moped transportation. The needs are quite different from Uber or other services.
The ingenuity and creativity is there to create products based on what the market is really looking for. That kind of environment has been established. There are tremendous opportunities in the under-developed areas, including Southeast Asia, maybe even in Africa or South America. I will probably say that in the future, investment in infrastructure in that kind of environment is going to be much cheaper. For example, the new way of doing your banking or creating bank accounts could be way different. Banks today have to provide the right services to end users, because otherwise they will lose them.
So innovation is really created by what is required by the market. It will be much more dynamic. It’s nothing like it used to be, where innovation has to come from the U.S. The “time machine” way of doing business – where you see something successful, copy and bring it back – will shift to the instantaneous requirement of using available technology and find the right solution.
Certainly, we’re seeing this play out live, especially where there’s a lot of applications that have been super localized and native to China.
Hong: TikTok is one example of that.
Yep, I agree. But there’re also some strategies, business models or best practices that transcend time. Given your 30+ years of experience working between the U.S. and China, what would you consider the key lessons you learned over that time?
Hong: Recently I have been bothered by the political uncertainties. I have a very unique position. I have an American, Taiwanese and Hong Kong passport. I really loved those places and have tremendous respect for all of them.
I don’t think politics should get involved in real business. They should let the markets expand. I really wish the U.S., China and everyone else just let users or businesses behave, instead of having the government intervene. This is something that I really worry about and want to find a way to avoid.
But on the other hand, in my past 30 years of experience, a lot of people have helped me and trust in me. And I give the same trust back to the people I invested. What I learned is the importance of integrity. If you don’t have integrity, it doesn’t matter if you are very smart, very hardworking or creative. Don’t just look at the opportunity. Test if this person is trustworthy or has integrity. If they do, then you can move on to see if they are energetic enough or creative enough.
Yeah. I hear you loud and clear there. Perhaps that’s one of the secret sauce you and Masa and team had over the years, in terms of how you built your business and your team. Certainly Masa saw something in you, in Jack Ma and in the other folks he’s worked with over the years.
Hong, thank you so much for your time. I really appreciate your sharing your story and insights.
Hong: My pleasure.
(Masa with Hong and UT Starcom team during their kick off in Hangzhou)